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What is the role of the board of directors in corporate governance? A. The board is empowered to hire and fire managers and set compensation

What is the role of the board of directors in corporate governance?

A.

The board is empowered to hire and fire managers and set compensation contracts.

B.

Typically, a board of directors approves major investment decisions and acquisitions.

C.

The board of directors is the primary internal control mechanism and the first line of defense to prevent fraud, agency conflicts, and mismanagement.

D.

All of the above are functions of a board of directors.

2.

VFIC Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $100,000 and last for one year. The management team believes that there is a 30% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then VFIC will invest $2 million to build a plant immediately that will generate expected annual after-tax cash flows of $300,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $150,000 in perpetuity starting in year two. VFIC's cost of capital is 10%. Given the above information, what is the value of the option to sell the prototype?

A.

$0

B.

$136,364

C.

$31,818

D.

$135,000

E.

None of the above

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